NEW YORK CITY (AFP) – The U.S. government on Tuesday sued Bank of America for defrauding investors in the sale of $850 million in mortgage-backed securities ahead of the housing bust.
The Department of Justice civil complaint alleges Bank of America lied to investors about the riskiness of the mortgage loans backing the securities, and intentionally avoided performing adequate due diligence on them, leading to investor losses surpassing $100 million.
Unlike some of the other sub-prime-based mortgage securities that soured during the housing bust and spawned messy litigation, the mortgages in Tuesday’s U.S. suit against Bank of America were sold as “prime” loans, meaning they purportedly had a low likelihood of falling into default.
The high rating of the loans “signified a safe and conservative investment and justified the high prices,” said the complaint.
However, the suit alleges the loans were far riskier than Bank of America said. It cited the bank’s former chief executive, Ken Lewis, as having referred to one type of loan included in the securities, “wholesale” loans executed through third-parties, as “toxic waste.”
Despite the “prime” rating, at least 23 percent of the mortgages in the securities have defaulted or were delinquent as of June 2013, according to the complaint.
A Bank of America spokesman denied the bank was responsible for the losses.
In an emailed statement, he argued that the “prime” designation was justified, saying the loans in question had performed better than similar loans originated and securitized at the time by other financial institutions.
Instead, he blamed the losses on the general downturn of the market and economy, which sank into deep recession in 2008-2009.
And he said the buyers of the securities were “sophisticated investors who had ample access to the underlying data.”
Copyright 2013 The National Memo